26 U.S.C. § 1371

Coordination with subchapter C

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(a) Application of subchapter C rules

Except as otherwise provided in this title, and except to the extent inconsistent with this subchapter, subchapter C shall apply to an S corporation and its shareholders.

(b) No carryover between C year and S year(1) From C year to S year

No carryforward, and no carryback, arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation.

(2) No carryover from S year

No carryforward, and no carryback, shall arise at the corporate level for a taxable year for which a corporation is an S corporation.

(3) Treatment of S year as elapsed year

Nothing in paragraphs (1) and (2) shall prevent treating a taxable year for which a corporation is an S corporation as a taxable year for purposes of determining the number of taxable years to which an item may be carried back or carried forward.

Except as provided in paragraphs (2) and (3) and subsection (d)(3), no adjustment shall be made to the earnings and profits of an S corporation.

(2) Adjustments for redemptions, liquidations, reorganizations, divisives, etc.

In the case of any transaction involving the application of subchapter C to any S corporation, proper adjustment to any accumulated earnings and profits of the corporation shall be made.

(3) Adjustments in case of distributions treated as dividends under section 1368(c)(2)

Paragraph (1) shall not apply with respect to that portion of a distribution which is treated as a dividend under section 1368(c)(2).

(d) Coordination with investment credit recapture(1) No recapture by reason of election

Any election under section 1362 shall be treated as a mere change in the form of conducting a trade or business for purposes of the second sentence of section 50(a)(6).

(2) Corporation continues to be liable

Notwithstanding an election under section 1362, an S corporation shall continue to be liable for any increase in tax under section 49(b) or 50(a) attributable to credits allowed for taxable years for which such corporation was not an S corporation.

(3) Adjustment to earnings and profits for amount of recapture

Paragraph (1) of subsection (c) shall not apply to any increase in tax under section 49(b) or 50(a) for which the S corporation is liable.

(e) Cash distributions during post-termination transition period(1) In general

Any distribution of money by a corporation with respect to its stock during a post-termination transition period shall be applied against and reduce the adjusted basis of the stock, to the extent that the amount of the distribution does not exceed the accumulated adjustments account (within the meaning of section 1368(e)).

(2) Election to distribute earnings first

An S corporation may elect to have paragraph (1) not apply to all distributions made during a post-termination transition period described in section 1377(b)(1)(A). Such election shall not be effective unless all shareholders of the S corporation to whom distributions are made by the S corporation during such post-termination transition period consent to such election.

(f) Cash distributions following post-termination transition period

In the case of a distribution of money by an eligible terminated S corporation (as defined in section 481(d)) after the post-termination transition period, the accumulated adjustments account shall be allocated to such distribution, and the distribution shall be chargeable to accumulated earnings and profits, in the same ratio as the amount of such accumulated adjustments account bears to the amount of such accumulated earnings and profits.

(Added Pub. L. 97–354, § 2, Oct. 19, 1982, 96 Stat. 1681; amended Pub. L. 98–369, div. A, title VII, § 721(e), (o), (x)(3), July 18, 1984, 98 Stat. 967, 970, 971; Pub. L. 99–514, title XVIII, § 1899A(33), (34), Oct. 22, 1986, 100 Stat. 2960; Pub. L. 101–508, title XI, § 11813(b)(23), Nov. 5, 1990, 104 Stat. 1388–555; Pub. L. 104–188, title I, § 1310, Aug. 20, 1996, 110 Stat. 1784; Pub. L. 115–97, title I, § 13543(b), Dec. 22, 2017, 131 Stat. 2155; Pub. L. 117–167, div. A, § 107(b)(3)(C), Aug. 9, 2022, 136 Stat. 1398; Pub. L. 119–21, title VII, § 70513(b)(3)(B)(i), July 4, 2025, 139 Stat. 272.)Editorial NotesPrior Provisions

A prior section 1371, added Pub. L. 85–866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1650; amended Pub. L. 86–376, § 2(a), Sept. 23, 1959, 73 Stat. 699; Pub. L. 88–272, title II, § 233(a), Feb. 26, 1964, 78 Stat. 112; Pub. L. 94–455, title IX, § 902(a)(1), (2), (c)(1), (2), Oct. 4, 1976, 90 Stat. 1608, 1609; Pub. L. 95–600, title III, §§ 341, 342, title VII, § 701(y)(1), Nov. 6, 1978, 92 Stat. 2843, 2921; Pub. L. 96–589, § 5(d), Dec. 24, 1980, 94 Stat. 3406; Pub. L. 97–34, title II, §§ 233(a), 234(a), (b), Aug. 13, 1981, 95 Stat. 250, 251; Pub. L. 97–448, title I, § 102(i)(1), Jan. 12, 1983, 96 Stat. 2372, related to definitions applicable to election of small business corporations as to taxable status, prior to the general revision of this subchapter by section 2 of Pub. L. 97–354.

Amendments

2025—Subsec. (d)(1). Pub. L. 119–21 substituted “section 50(a)(6)” for “section 50(a)(5)”.

2022—Subsec. (d)(1). Pub. L. 117–167 substituted “section 50(a)(5)” for “section 50(a)(4)”.

2017—Subsec. (f). Pub. L. 115–97 added subsec. (f).

1996—Subsec. (a). Pub. L. 104–188 reenacted heading without change and amended text generally. Prior to amendment, text read as follows:

“(1) In general.—Except as otherwise provided in this title, and except to the extent inconsistent with this subchapter, subchapter C shall apply to an S corporation and its shareholders.

“(2) S corporation as shareholder treated like individual.—For purposes of subchapter C, an S corporation in its capacity as a shareholder of another corporation shall be treated as an individual.”

1990—Subsec. (d)(1). Pub. L. 101–508, § 11813(b)(23)(A), substituted “section 50(a)(4)” for “section 47(b)”.

Subsec. (d)(2), (3). Pub. L. 101–508, § 11813(b)(23)(B), substituted “section 49(b) or 50(a)” for “section 47”.

1986—Subsec. (e)(1). Pub. L. 99–514, § 1899A(33), inserted “(within the meaning of section 1368(e))”.

Subsec. (e)(2). Pub. L. 99–514, § 1899A(34), struck out “(within the meaning of section 1368(e))” after “to such election”.

1984—Subsec. (c)(1). Pub. L. 98–369, § 621(e)(2), substituted “paragraphs (2) and (3) and subsection (d)(3)” for “paragraphs (2) and (3)”.

Subsec. (d)(3). Pub. L. 98–369, § 721(e)(1), added par. (3).

Subsec. (e). Pub. L. 98–369, § 721(o), amended subsec. (e) generally, designating existing provisions as par. (1) and adding par. (2).

Subsec. (e)(2). Pub. L. 98–369, § 721(x)(3), inserted “(within the meaning of section 1368(e))”.

Statutory Notes and Related SubsidiariesEffective Date of 2025 Amendment

Amendment by Pub. L. 119–21 applicable to taxable years beginning after July 4, 2025, see section 70513(g)(1) of Pub. L. 119–21, set out in a note under section 48 of this title.

Effective Date of 2022 Amendment

Amendment by Pub. L. 117–167 applicable to property placed in service after Dec. 31, 2022, and, for any property the construction of which begins prior to Jan. 1, 2023, only to the extent of the basis thereof attributable to the construction, reconstruction, or erection after Aug. 9, 2022, see section 107(f) of Pub. L. 117–167, set out as a note under section 905 of Title 2, The Congress.

Effective Date of 1996 Amendment

Amendment by Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title.

Effective Date of 1990 Amendment

Amendment by Pub. L. 101–508 applicable to property placed in service after Dec. 31, 1990, but not applicable to any transition property (as defined in section 49(e) of this title), any property with respect to which qualified progress expenditures were previously taken into account under section 46(d) of this title, and any property described in section 46(b)(2)(C) of this title, as such sections were in effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 101–508, set out as a note under section 45K of this title.

Effective Date of 1984 Amendment

Amendment by Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as a note under section 1361 of this title.

Savings Provision

For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title.

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.

Notes of Decisions

Cited in 59 cases (1 in the last 5 years), 1963–2023 · leading case: Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505 (Mass. 1975).

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Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505 (Mass. 1975). · cites it 2× “§§ 1371-1379 (1970), enables "small business corporations," defined by the statute ( 26 U.S.C. § 1371 [a] [1970]), to make an election which generally exempts the corporation from taxation ( 26 U.”

Stephanie Keller v. Est. of Edward Stephen McRedmond, 495 S.W.3d 852 (Tenn. 2016). “Nevertheless, it held: [T]his fact does not entitle plaintiffs to bring a cause of action to recover damages sustained by the corporation, even where the corporation’s status is that of a subchapter-S corporation under 26 U.S.C. § 1371 _ [S]ubchapter-S status pertains only to a…”

Monarch Gas Co. v. Illinois Com. Comm'n, 366 N.E.2d 945 (Ill. App. Ct. 1977). · cites it 2× “The Commission found that in 1970 Monarch had elected, pursuant to Subchapter S of the Internal Revenue Code ( 26 USC §1371 et seq.) to be taxed through its stockholders on the taxable, income of the corporation, in lieu of paying the corporate tax.”

James J. Reiherzer v. Daniel J. Shannon, & Cent. States, Se. & Sw. Areas Pension Fund, 581 F.2d 1266 (7th Cir. 1978). “On the advice of counsel in 1959, Cartage began filing its federal income tax returns as a Subchapter S, small business corporation pursuant to 26 U.S.C. §§ 1371 et seq., and Reiherzer stopped deducting Social Security taxes from his monthly salary declaring himself…”

In Re the Marriage of Brand, 44 P.3d 321 (Kan. 2002). “2d at 344 (citing 26 U.S.C. § 1371 et seq. [1982]). A Subchapter S corporation allocates various items of income to shareholders based upon the shareholder’s proportionate ownership of stock.”

E. Keith Owens v. Comm'r of Internal Revenue, 568 F.2d 1233 (6th Cir. 1977). “26 U.S.C. § 1371 (a) provides: For purposes of this subchapter, the term “small business corporation” means a domestic corporation which is not a member of an affiliated group (as defined in section 1504) and which does not— (1) have (except as provided in subsection (e)) more…”

Ad-Vantage Tel. Directory Consultants, Inc., Cross v. Gte Directories Corp., Cross-Appellee, 849 F.2d 1336 (11th Cir. 1987). “26 U.S.C. § 1371 . In this way the corporation avoids the corporate “double tax,” whereby the corporation is first taxed on its income, and then the individual stockholders are taxed on their stock dividends.”

Romano v. Weiss, 524 N.E.2d 1381 (Mass. App. Ct. 1988). · cites it 3× “4 The distinguishing feature of such a corporation is that corporate earnings (or losses) pass through and are taxed (or credited) directly to the shareholders, in proportion to their ownership interests, rather than to the corporation itself.”

Meyer v. Charnes, 705 P.2d 979 (Colo. Ct. App. 1985). · cites it 2× “Denver Motel Enterprises (DME), which owns and operates a motel in Denver, is a Colorado corporation which has elected to be taxed as a Subchapter S corporation pursuant to 26 U.S.C. §§ 1371 , et seq. (1982). The corporate stock of DME is owned in equal shares by taxpayers.”

Samuel Pollack & Annie Pollack v. Comm'r of Internal Revenue, 392 F.2d 409 (5th Cir. 1968). “The Commissioner disallowed the claimed deductions and the Tax Court sustained the disallowance on the ground that Shelborne failed to qualify as a “small business corporation” under section 1371 of the Code for the reason that it had issued more than “one class of stock” within…”

United States v. The Adams Bldg. Co., Inc., 531 F.2d 342 (6th Cir. 1976). “Subchapter S of the Internal Revenue Code of 1954, 26 U.S.C. § 1371 et seq., allows shareholders in certain coporations to elect partnership-type taxation.”

Sheldon B. Bufferd Phyllis Bufferd v. Comm'r of Internal Revenue, 952 F.2d 675 (2d Cir. 1992). “26 U.S.C. § 1371 et seq. (1954 Act) (unless otherwise noted, all references are to the Internal Revenue Code of 1954 as amended and effective during the years in issue).”

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